China IPO revival to extend bond market slump
The mainland's plans to restart initial public offerings after a one-year break and allow firms to sell preferred stock will soak up cash and extend a bond market slump into next year, according to its largest brokerages.
The mainland's plans to restart initial public offerings after a one-year break and allow firms to sell preferred stock will soak up cash and extend a bond market slump into next year, according to its largest brokerages.
The central government's benchmark 10-year bond yield has climbed 93 basis points since the end of June, the biggest half-yearly surge on record, as plans to allow the market to play a greater role in setting interest rates drove borrowing costs higher.
The notes snapped a seven-day rally on Monday after the securities regulator indicated it would end the offering freeze and start processing applications from a queue of more than 760 companies.
"New stock offerings will be attractive because of cheaper valuations, and they will have good growth prospects as they're likely to be linked to China's new economy," said Zeng Xianzhao, an analyst at Everbright Securities. "They will definitely undercut the appeal of bonds as risk-averse investors may consider buying cheap stocks."
Banks from Credit Agricole CIB to Nomura warn rising borrowing costs may drag on growth in Asia's largest economy as policymakers seek to implement the most far-reaching policy changes since the 1990s.
Small-cap stocks slumped this week on concern the offerings will divert funds from existing equities, while the China Securities Regulatory Commission's (CSRC) plan for a trial preferred-share programme will provide another alternative to bond-market investments.
The mainland first signalled a move to overhaul the flotation process in a 60-point statement released after a Communist Party meeting last month where leaders pledged to give market forces a "decisive role" in allocating resources.
Fifty firms will be ready for share sales by the end of January, the CSRC said on Saturday.
The mainland, home to the world's largest listings market in 2010, has barred new share sales since October last year to reduce fraud and prevent excessive supply from dragging down stocks.
A similar ban was imposed in 2008 to bolster equity markets. In the month after offerings resumed in July 2009, the 10-year government bond yield jumped 22 basis points and money market rates surged 37 basis points.
The new plans see the CSRC mainly ensuring companies meet listing requirements.
The rules may reduce the valuation of new stocks, enticing investors and undercutting the relative value of bonds, Xu Hanfei, a bond analyst at Guotai Junan Securities, wrote in a research report.
The bond market will also take a hit from the plan to allow companies to issue preferred shares, which do not carry voting rights and grant holders a greater claim on a company's assets or earnings than common stock.
"Preferred stocks exist in the realm between equities and bonds, so they have a certain degree of interchangeability with high-yield bonds, which are the closest to stocks," said Min Shuai, an analyst at Guotai Junan. Speculative-grade notes may feel the impact most, he added.
Zeng estimates that preferred shares may attract 100 billion yuan (HK$127 billion) of funds next year, 60 per cent of which may be diverted from fixed-income securities.
